EU agrees to ECB supervisor role

European Union lawmakers and national governments clinched a provisional deal on legislation to turn the European Central Bank into a supervisor, a move that would pave the way for the currency bloc’s firewall fund to provide direct bailouts to banks.

While agreement was reached on the ECB bill in Brussels today, talks will continue this afternoon on a second draft law that would upgrade the role of the London-based European Banking Authority, according to Philippe Lamberts, a lawmaker in the European Parliament. The ECB deal is contingent on an agreement being reached with the central bank on Parliamentary controls, he said.

The single supervisor is “major federal progress,” said Lamberts, a Belgian member of the Parliament’s Economic and Monetary Affairs Committee. “Banks with assets between 75 and 80 percent of the total assets in Europe will be directly supervised.”

EU leaders called for the new supervisor as they sought to tame a fiscal crisis that has forced Greece, Portugal, Ireland, Spain and most recently Cyprus to seek international aid. The move is part of a broader plan to build a so-called banking union that may also include a central authority for resolving failing lenders, due to be proposed later this year.

Tough measures

Cypriots woke up on March 16 to find bank transfers frozen as the country’s authorities prepared to tax accounts as part of a rescue package thrashed out by euro-zone finance ministers. The agreement remains in limbo as Cypriot lawmakers weigh whether to approve the deal amid warnings from the country’s president, Nicos Anastasiades, that tough measures are needed to avert the collapse of the banking system.

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The ECB this week has been one of the leading voices calling for depositors in Cyprus to accept the one-time levy, intended to raise 5.8 billion euros ($7.5 billion) along side a planned 10 billion-euro official-sector rescue package.

Sharon Bowles, chairwoman of the economic committee, said that the ECB’s role in designing the Cypriot aid package raised concerns about how it would act once it has oversight powers.

“Central banks have to be tough sometimes, but what hope is there for accountability when they seemingly force decisions like this at gunpoint with no regard for financial legislation,” Bowles said in an e-mailed statement ahead of today’s talks. “We must question ECB independence on supervision. If anything this strengthens the case for more democratic accountability.”

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Lamberts said Parliament will hold talks with the ECB to determine the details of how “democratic control” will work. “There are still some precisions to be made as to what we can do if we want to fire the chair and the vice chair” of the ECB’s oversight board, “so there’s still some writing to be made on that.”

Under the plans, the ECB will directly oversee around 150 banks, according to the central bank’s own estimates.

The ECB will directly oversee at least the top three biggest banks of every participating nation unless “justified by particular circumstances.”

Establishing the single supervisor is a condition for allowing direct bank aid from the euro area’s firewall. Finance ministers have pledged to agree on guidelines for such aid by mid-year.

Monetary policy

International Monetary Fund staff called last week for the euro area to press ahead with setting up the single supervisor, in a bid to break a vicious circle damaging confidence in Europe’s banks and public finances. The fund also warned that the new supervisor will need to be independent from the ECB’s monetary policy role to prevent conflicts of interest and keep financial supervision from taking a subservient role.

IMF Managing Director Christine Lagarde today endorsed rescue deal for Cyprus outlined by euro-area finance chiefs, to which the IMF may also contribute. She said Cyprus will need to shrink its banking sector as part of any rescue package.

“It is still very much a central piece of the agreement that was reached that the banks will have to be right-sized and restructured properly in order to make the whole business model sustainable going forward,” Lagarde said in Frankfurt.

EU governments have provided 1.7 trillion euros of aid for their banking systems in response to the financial crisis that erupted following the 2008 collapse of Lehman Brothers Holdings Inc. The amount is equivalent to more than 13 percent of the bloc’s economic output, according to European Commission data.

The legislation to hand the ECB bank oversight powers must be approved by national governments and voted on by the European Parliament before it can take effect. The ECB will take at least a year to set up shop once the regulations are in place.